SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-19164
CAPITAL PREFERRED YIELD FUND, A CALIFORNIA LIMITED PARTNERSHIP
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0190817
(State of organization) (I.R.S. Employer Identification Number)
7175 W. JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Class A
Limited Partner
Interest
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
Exhibit Index Appears on Pages 34
Page 1 of 35 Pages
<PAGE>
Item 1. Business
--------
Capital Preferred Yield Fund, a California limited partnership (the
"Partnership"), was organized on July 13, 1989 for the purpose of owning and
leasing equipment. CAI Partners Management Company, a Colorado corporation and a
wholly owned subsidiary of Capital Associates, Inc. ("CAI"), is the general
partner of the Partnership.
Capital Associates International, Inc. ("CAII"), an affiliate of the general
partner, is the Class B limited partner of the Partnership. In exchange for its
Class B limited partner interest, CAII contributed equipment totaling $5,538,805
(i.e., 10% of the net offering proceeds) to the Partnership making it the
largest single investor in the Partnership.
During 1998, the Partnership liquidated substantially all of its net assets and
distributed the related proceeds to the partners in accordance with the
Partnership Agreement. As of December 31, 1998, the Partnership retained assets
equal to the estimated settlement value of all remaining liabilities. It is the
intent of the general partner to liquidate the remaining receivables and settle
all liabilities during 1999. Excess cash remaining after the settlement of
liabilities, if any, will be distributed to the Partners in accordance with the
Partnership Agreement.
Since its formation, the Partnership acquired equipment of various types under
lease to third parties on short-term leases (five years or less). All of the
equipment was purchased by CAII directly from manufacturers or from other
independent third parties and sold to the Partnership. The equipment generally
consisted of transportation and industrial equipment, computer equipment, office
furniture and medical equipment, among others (the "equipment"). The Partnership
entered its liquidation stage, as defined in the Partnership Agreement, in April
1996.
The Partnership had no employees. The officers, directors and employees of the
general partner and its affiliates performed services on behalf of the
Partnership. The general partner was entitled to receive certain fees and
expense reimbursements in connection with the performance of these services. See
Item 10 of this Report, "Directors and Executive Officers of the Partnership"
and Item 13 of this Report, "Certain Relationships and Related Transactions".
The Partnership leased equipment to a significant number of lessees. Two lessees
and their affiliates accounted for approximately 20% ($578,932) and 10%
($297,550) of total leasing and remarketing revenue of the Partnership during
1998.
Item 2. Properties
----------
The Partnership does not own or lease any physical properties other than the
equipment discussed in Item 1 of this Report, "Business".
Item 3. Legal Proceedings
-----------------
Neither the Partnership nor any of the Partnership's equipment is the subject of
any material pending legal proceedings.
-2-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the limited partners of the Partnership,
through the solicitation of proxies or otherwise, during the fourth quarter of
1998.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
----------------------------------------------------------------------
Matters
-------
(a) The Partnership's Class A limited partner units, Class B limited partner
interest and general partner interest are not publicly traded. There is no
established public trading market for such units and interests.
(b) As of December 31, 1998, the date of dissolution, there were 3,494 Class A
limited partners.
(c) Distributions
-------------
During 1998, the Partnership made twelve (12) monthly distributions (a
portion of which constituted a return of capital) to Class A limited
partners as follows:
Distributions Per
$250 Class A Limited
For the Payment Partner Unit (computed Total
Month Ended Made During on weighted average) Distributions
----------- ----------- ---------------------- -------------
December 31, 1997 January 1998 $ 3.58 $ 900,191
January 31, 1998 February 1998 3.18 799,809
February 28, 1998 March 1998 3.18 799,809
March 31, 1998 April 1998 .28 71,382
April 30, 1998 May 1998 .22 55,481
May 31, 1998 June 1998 .18 44,985
June 30, 1998 July 1998 6.76 1,700,035
July 31, 1998 August 1998 4.77 1,199,589
August 31, 1998 September 1998 .82 205,130
September 30, 1998 October 1998 9.86 2,479,217
October 31, 1998 November 1998 - -
November 30, 1998 December 1998 .81 202,344
------- -----------
$ 33.64 $ 8,457,972
======= ===========
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion
of each cash distribution by a partnership which exceeds its net income for
the fiscal period may be deemed a return of capital for accounting
purposes. However, the total percentage of a partnership's return on
capital over its life can only be determined after all residual cash flows
(which include proceeds from the releasing and sales of equipment after
initial lease terms expire) are realized at the termination of the
Partnership. Total distributions declared and paid to Class A limited
partners were $67,529,938 from the inception of the Partnership through
December 31, 1998.
-3-
<PAGE>
Item 5. Market for the Partnership's Common Equity and Related Stockholder
----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions to the general partner and Class B limited partner during
1998 are discussed in Item 13 of this Report, "Certain Relationships and
Related Transactions".
The Partnership declared a final distribution in December 1998. In
calculating the amount of such final distribution, the General Partner
considered the current as well as contingent liabilities incidental to the
liquidation of the Partnership, all of which are set forth in the audited
financial statements contained herein.
During 1997, the Partnership made twelve (12) monthly distributions (a
portion of which constituted a return of capital) to Class A limited
partners as follows:
Distributions Per
$250 Class A Limited
For the Payment Partner Unit (computed Total
Month Ended Made During on weighted average) Distributions
----------- ----------- ---------------------- -------------
December 31, 1996 January 1997 $ 3.98 $ 1,000,571
January 31, 1997 February 1997 2.78 699,833
February 28, 1997 March 1997 2.38 599,857
March 31, 1997 April 1997 3.18 800,310
April 30, 1997 May 1997 3.18 799,707
May 31, 1997 June 1997 2.82 709,740
June 30, 1997 July 1997 2.82 710,552
July 31, 1997 August 1997 2.82 709,740
August 31, 1997 September 1997 1.19 300,018
September 30, 1997 October 1997 1.19 300,241
October 31, 1997 November 1997 1.19 299,928
November 30, 1997 December 1997 1.99 499,881
------- -----------
$ 29.52 $ 7,430,378
======= ===========
The following represents annual cumulative distributions per Class A
limited partner unit, as described in note 1 to Notes to Financial
Statements.
-4-
<PAGE>
Item 5. Market for the Partnership's Common Equity and Related Stockholder
----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distribution Amount Distribution %
per $250 Class A per $250 Class A
Limited Partner Unit Limited Partner Unit
Payment (computed on (computed on
Made During weighted average) weighted average) (1)
----------- -------------------- ---------------------
1990 $ 27.50 12%
1991 30.00 12%
1992 30.00 12%
1993 32.10 13%
1994 32.46 13%
1995 32.46 13%
1996 42.17 17%
1997 29.52 12%
1998 33.64 13%
--------
$ 289.85
========
(1) Cumulative distributions, as described in note 1 to Notes to
Consolidated Financial Statements, began February 1990.
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
1994 through 1998. The data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing with Item 8
herein.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue $ 1,512,345 $ 7,673,132* $11,319,825 $15,975,029 $20,833,137
Net income (loss) (211,615) 2,056,120* 2,239,112 2,943,220 2,793,164
Net income (loss) per weighted average
Class A limited partner unit outstanding (2.18) 6.34* 6.23 9.24 8.67
Total assets 798,707 12,091,018 22,981,183 37,516,977 53,791,269
Discounted lease rentals - 7,835 4,363,104 9,146,266 20,324,037
Financed operating lease rentals - 1,123,270 1,329,087 1,594,646 -
Distributions declared to partners 8,392,439 8,281,136 12,106,228 9,276,551 9,286,099
Distributions declared to Class A limited
partners per weighted average
Class A limited partner unit outstanding 30.07 29.14 42.17 32.46 32.46
</TABLE>
*as restated -see Note 1 to the Partnership's financial statements
-5-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations
---------------------
I. Results of Operations
---------------------
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing condensed statements of operations
categories and analyses of changes in those condensed categories derived from
the Statements of Operations:
<TABLE>
<CAPTION>
Years Ended December 31, Years Ended December 31,
------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
---------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 314,283 $ 2,716,704 $ (2,402,421) $ 2,716,704 $ 3,064,878 $ (348,174)
Equipment sales margin 818,235 871,137* (52,902) 871,137* 1,350,258 (479,121)
Interest income 104,291 75,168 29,123 75,168 188,628 (113,460)
Management fees paid to general partner (34,133) (425,860) 391,727 (425,860) (702,219) 276,359
Direct services from general partner (95,968) (136,955) 40,987 (136,955) (101,145) (35,810)
General and administrative (285,316) (304,074) 18,758 (304,074) (431,288) 127,214
Provision for losses (836,085) (740,000) (96,085) (740,000) (1,130,000) 390,000
Liquidation (196,922) - (196,922) - - -
---------- ----------- ------------ ----------- ----------- ----------
Net income (loss) $ (211,615) $ 2,056,120* $ (2,267,735) $ 2,056,120* $ 2,239,112 $ (182,992)
========== =========== =========== =========== =========== ==========
</TABLE>
(* as restated - see Note 1 to the Partnership's financial statements)
LEASING MARGIN
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating lease rentals $ 482,031 $ 5,678,596 $ 8,584,425
Direct finance lease income 107,788 1,048,231 1,196,514
Depreciation (234,754) (3,760,718) (6,124,604)
Interest expense on discounted lease rentals (28) (193,516) (501,872)
Interest expense on financed operating lease receivables (40,754) (55,889) (89,585)
----------- ----------- -----------
Leasing margin $ 314,283 $ 2,716,704 $ 3,064,878
=========== =========== ===========
Leasing margin ratio 53% 40% 31%
=========== =========== ===========
</TABLE>
The Partnership is in its liquidation stage as defined in the Partnership
Agreement. During 1997, the Partnership sold a substantial portion of its
assets. During 1998, the Partnership liquidated its remaining equipment. As a
result, both the size of the Partnership's leasing portfolio and the amount of
leasing revenue declined.
-6-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Years ended December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
Equipment sales revenue $ 2,248,520 $ 11,670,273* $ 4,868,827
Cost of equipment sales (1,430,285) (10,799,136) (3,518,569)
------------ ------------ ------------
Equipment sales margin $ 818,235 $ 871,137* $ 1,350,258
============ ============ ============
* as restated - see Note 1 to the Partnership's financial statements
The Partnership liquidated effective December 31, 1998. During 1998, all
remaining equipment was sold to either the original lessee or third parties.
INTEREST INCOME
Interest income increased in 1998 compared to 1997 due to the investment of cash
held for the final distribution to the limited partners.
Interest income decreased in 1997 compared to 1996 due to a decrease in cash
available for investment as the Partnership was in its liquidation stage and
therefore, distributing excess cash to the partners.
MANAGEMENT FEES PAID TO GENERAL PARTNER
The general partner earns management fees as compensation for services performed
in connection with managing the Partnership's equipment equal to the lesser of
(a) 5% of gross rentals received (limited to 2% of gross rentals received in the
case of full payout leases) or (b) the fee which the general partner reasonably
believes to be competitive with that which would be charged by a non-affiliate
for rendering comparable services as permitted under the Partnership Agreement.
Management fees decreased in 1998 and 1997 compared to 1996 due to portfolio
runoff resulting in lower gross rentals received by the Partnership.
DIRECT SERVICES FROM GENERAL PARTNER
The general partner and its affiliates provide accounting, investor relations,
billing, collecting, asset management, and other administrative services to the
Partnership. The Partnership reimburses the general partner for these services
performed on its behalf as permitted under the terms of the Partnership
Agreement. Direct services from general partner decreased in 1998 compared to
1997 primarily due to the decrease in the size of the portfolio. Direct services
from general partner increased in 1997 compared to 1996 primarily due to
activities associated with liquidating the Partnership's assets.
-7-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased in 1998 compared to 1997 due to a
decrease in costs associated with the remarketing of equipment returned to the
Partnership at lease maturity. The decrease from 1996 to 1997 is primarily
attributable to a reimbursement to the general partner recorded in 1996 for
prior years insurance costs in the amount of $104,027.
PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value is
reported as equipment sales margin (if the equipment is sold) or leasing margin
(if the equipment is re-leased). The realization of less than the carrying value
of equipment (which is typically not known until remarketing subsequent to the
initial lease termination has occurred) is recorded as provision for losses.
Residual values are established equal to the estimated value to be received from
the equipment following termination of the lease. In estimating such values, the
Partnership considers all relevant facts regarding the equipment and the lessee,
including, for example, the likelihood that the lessee will re-lease the
equipment. The nature of the Partnership's leasing activities is that it has
credit and residual value exposure and, accordingly, in the ordinary course of
business, it will incur losses from those exposures. The Partnership performs
ongoing quarterly assessments of its assets to identify other-than-temporary
losses.
The provision for losses recorded during 1998 and 1997 were primarily related to
lessees returning equipment to the Partnership. For the year ended December 31,
1998, the Partnership recorded a loss of $500,000 on mining and transportation
equipment and office furniture, fixtures and equipment held for sale or
re-lease. The Partnership had previously expected to realize the carrying value
of the equipment through lease renewal and proceeds from the sales of equipment
to the original lessees. The fair market value of the equipment sold to third
parties was less than anticipated. In addition, the Partnership recorded a
provision for bad debt in the amount of $269,000 related to the equipment sales
receivable balance at December 31, 1998. Current liabilities and estimated
contingent liabilities for wrap-up of the dissolution of the partnership are
covered by the remaining cash and accounts receivable balances.
For 1997, the Partnership recorded losses of $625,000 on certain mining,
manufacturing and computer equipment held for sale or re-lease.
The provision for losses recorded during 1996 primarily related to the
following:
* Certain equipment was returned to the Partnership. The Partnership had
previously expected to realize the carrying value of this equipment through
lease renewals and proceeds from the sale of this equipment to the original
lessees. The fair market value of the equipment re-leased or sold to third
parties was less than anticipated as described below:
-8-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
PROVISION FOR LOSSES, continued
- $150,000 related to a lessee returning an aircraft, with a carrying
value of $1,250,000, to the Partnership.
- $130,000 related to a lessee experiencing severe financial
difficulties. The lessee notified the Partnership that it would be
returning the equipment currently under lease.
- $420,000 related to lessees returning modular buildings, computer
equipment, a telephone system and hospital equipment to the
Partnership.
- $110,000 related to the sale of equipment having a lower fair market
value than originally anticipated.
* $320,000 related to bankrupt lessees.
LIQUIDATION EXPENSES
All anticipated liquidation expenses were accrued at December 31, 1998. In
estimating the amount of such liquidation expenses, the General Partner
considered the current as well as contingent liabilities incidental to the
liquidation of the Partnership.
II. Liquidity and Capital Resources
-------------------------------
During 1998, 1997 and 1996, the Partnership declared distributions to the
partners of $8,392,439, $8,281,136 and $12,106,228, respectively. A portion of
such distributions constituted a return of capital for accounting purposes.
Distributions may be characterized for tax, accounting and economic purposes as
a return of capital, a return on capital or both. The portion of each cash
distribution by a Partnership which exceeds its net income for the fiscal period
may be deemed a return of capital. However, the total percentage of a
partnership's return on capital over its life can only be determined after all
residual cash flows (which include proceeds from the re-leasing and sales of
equipment after initial lease terms expire) have been realized at the
termination of the Partnership .
The Partnership liquidated (as defined in the Partnership Agreement) and a final
distribution was issued in December 1998. The general partner anticipates that
the cash and accounts receivable at December 31, 1998 are sufficient to satisfy
the Partnership's remaining liabilities. Excess cash remaining after settlement
of liabilities, if any, will be distributed to the partners in accordance with
the Partnership Agreement.
The Class B limited partner distributions of cash from operations are
subordinated to the Class A limited partners receiving cumulative distributions
of cash from operations, as scheduled in the Partnership Agreement (i.e., 13%).
Cumulative Class B distributions accrued since August 1997, in the amount of
$710,813, were paid in October 1998 as the cash available for distribution was
sufficient to cover the cumulative Class A limited partner distributions
payable. No further Class B distributions will be paid by the Partnership.
-9-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
II. Liquidity and Capital Resources, continued
YEAR 2000 ISSUES
An affiliate provides accounting and other administrative services, including
data processing services to the Partnership. The affiliate has conducted a
comprehensive review of its computer systems to identify systems that could be
affected by the Year 2000 issue. The Year 2000 issue results from computer
programs being written using two digits rather than four to define the
applicable year. Certain computer programs which have time-sensitive software
could recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in major system failures or miscalculations. Certain of the
affiliate's software has already been updated to correctly account for the Year
2000 issue. In addition, the affiliate is engaged in a system conversion,
whereby the affiliate's primary lease tracking and accounting software is being
replaced with new systems which will account for the Year 2000 correctly. The
affiliate expects that the new system will be fully operational by December 31,
1999, and therefore will be fully Year 2000 compliant. The affiliate does not
expect any other changes required for the Year 2000 to have a material effect on
its financial position or results of operations. As such, the affiliate has not
developed any specific contingency plans in the event it fails to complete the
conversion to a new system by December 31, 1999. In addition, the affiliate does
not expect any Year 2000 issues relating to its customers and vendors to have a
material effect on its financial position or results of operations.
III. New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is defined as
all recognized changes in equity during a period from transactions and other
events and circumstances except those resulting from investments by owners and
distributions to owners. Net income and items that previously have been recorded
directly in equity are included in comprehensive income. Statement 130 affects
only the reporting and disclosure of comprehensive income but does not affect
recognition or measurement of income. Statement 130 is effective for fiscal
years beginning after December 15, 1997, with earlier application permitted. The
Partnership adopted Statement 130 in the first quarter of 1998. The adoption did
not have an impact on its financial reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 provides
guidance for reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports of public companies. An operating segment
is defined as a component of a business that engages in business activities from
which it may earn revenue and incur expenses, a component whose operating
results are regularly reviewed by the company's chief operating decision maker,
and a component for which discrete financial information is available. Statement
131 establishes quantitative thresholds for determining operating segments of a
company. Statement 131 is effective for fiscal years beginning after December
15, 1997, with earlier application permitted. The Partnership adopted Statement
131 in the first quarter of 1998. Since the Partnership operates in a single
business segment, the adoption did not have an impact on its financial
reporting.
-10-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
III. New Accounting Pronouncements, continued
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133").
Statement 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Statement 133 is effective
for fiscal years beginning after June 15, 1999, with earlier application
permitted. Statement 133 will have no effect on the Partnership's financial
reporting.
IV. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
--------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to factors
that could cause actual future results to differ both adversely and materially
from currently anticipated results, including, without limitation; the level of
lease acquisitions; realization of residual values; customer credit risk;
competition from other lessors, specialty finance lenders or banks; and the
availability and cost of financing sources. Certain specific risks associated
with particular aspects of the Partnership's business are discussed in detail
throughout Parts I and II when and where applicable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The partnership was legally dissolved as of December 31, 1998 and all assets and
liabilities were stated at anticipated liquidation value. Consequently, the
partnership has no market risk exposure.
-11-
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
Financial Statements ------
--------------------
Independent Auditors' Report 13
Balance Sheets as of December 31, 1998 and 1997 14
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 15
Statements of Partners' Capital for the years
ended December 31, 1998, 1997 and 1996 16
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 17
Notes to Financial Statements 18-28
Financial Statement Schedule
----------------------------
Independent Auditors' Report 29
Schedule II - Valuation and Qualifying Accounts 30
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying balance sheets of Capital Preferred Yield Fund,
a California limited partnership, as of December 31, 1998 and 1997, and the
related statements of operations, partners' capital, and cash flows for each of
the years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Partnership is in the liquidation stage, whereby all
assets are expected to be liquidated during 1999 and all cash distributed to the
partners, after satisfaction of liabilities.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Preferred Yield Fund as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/KPMG LLP
--------------------
KPMG LLP
Denver, Colorado
February 22, 1999
-13-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997*
---- ----
Cash and cash equivalents $ 565,713 $ 2,839,510
Accounts receivable, net 232,994 7,059,347
Equipment held for sale or re-lease - 887,865
Net investment in direct finance leases - 229,696
Leased equipment, net - 1,074,600
----------- -----------
Total assets $ 798,707 $12,091,018
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payables to affiliates $ 177 $ 44,916
Accounts payable and accrued liabilities 788,945 905,979
Rents received in advance - 162,931
Distributions payable to partners 9,585 1,241,334
Discounted lease rentals - 7,835
Financed operating lease rentals - 1,123,270
----------- -----------
Total liabilities 798,707 3,486,265
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 360,000 units authorized; 251,328 and
251,388 units issued and outstanding in 1998
and 1997, respectively - 6,439,272
Class B - 2,165,481
----------- -----------
Total partners' capital - 8,604,753
----------- -----------
Total liabilities and partners' capital $ 798,707 $12,091,018
=========== ===========
* As restated - See Note 1 to the Partnership's Financial Statements
See accompanying notes to financial statements.
-14-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997* 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Operating lease rentals $ 482,031 $ 5,678,596 $ 8,584,425
Direct finance lease income 107,788 1,048,231 1,196,514
Equipment sales margin 818,235 871,137 1,350,258
Interest income 104,291 75,168 188,628
----------- ----------- -----------
Total revenue 1,512,345 7,673,132 11,319,825
----------- ----------- -----------
EXPENSES:
Depreciation 234,754 3,760,718 6,124,604
Interest on discounted lease rentals 28 193,516 501,872
Interest on financed operating lease receivables 40,754 55,889 89,585
Management fees paid to general partner 34,133 425,860 702,219
Provision for losses 836,085 740,000 1,130,000
Direct services from general partner 95,968 136,955 101,145
General and administrative 285,316 304,074 431,288
Liquidation 196,922 - -
----------- ----------- -----------
Total expenses 1,723,960 5,617,012 9,080,713
----------- ----------- -----------
NET INCOME (LOSS) $ (211,615) $ 2,056,120 $ 2,239,112
=========== =========== ===========
NET INCOME (LOSS) ALLOCATED:
To the general partner $ 377,708 $ 341,070 $ 544,780
To the Class A limited partners (547,940) 1,594,532 1,575,257
To the Class B limited partner (41,383) 120,518 119,075
----------- ----------- -----------
$ (211,615) $ 2,056,120 $ 2,239,112
=========== =========== ===========
Net income (loss) per weighted average Class A
limited partner unit outstanding $ (2.18) $ 6.34 $ 6.23
=========== =========== ===========
Weighted average Class A limited
partner units outstanding 251,355 251,556 252,689
=========== =========== ===========
</TABLE>
* As restated - See Note 1 to the Partnership's Financial Statements
See accompanying notes to financial statements.
-15-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital, January 1, 1996 $ - 253,664 $ 21,715,744 $ 3,136,081 $ 24,851,825
Redemptions - (1,617) (130,788) - (130,788)
Net income 544,780 - 1,575,257 119,075 2,239,112
Distributions declared to partners (544,780) - (10,960,525) (600,923) (12,106,228)
---------- -------- ------------ ------------ ------------
Partners' capital, December 31, 1996 - 252,047 12,199,688 2,654,233 14,853,921
Redemptions - (659) (24,152) - (24,152)
Net income* 341,070 - 1,594,532 120,518 2,056,120
Distributions declared to partners (341,070) - (7,330,796) (609,270) (8,281,136)
---------- -------- ------------ ------------ ------------
Partners' capital,
December 31, 1997* - 251,388 6,439,272 2,165,481 8,604,753
Redemptions - (60) (699) - (699)
Adjustments - - 1,667,147 (1,667,147) -
Net income (loss) 377,708 - (547,940) (41,383) (211,615)
Distributions declared to partners (377,708) - (7,557,780) (456,951) (8,392,439)
---------- -------- ------------ ------------ ------------
Partners' capital,
December 31, 1998 $ - 251,328 $ - $ - $ -
========== ======== ============ ============ ============
</TABLE>
* As restated - See Note 1 to the Partnership's Financial Statements
See accompanying notes to financial statements.
-16-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997* 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (211,615) $ 2,056,120 $ 2,239,112
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 234,754 3,760,718 6,124,604
Provision for losses 836,085 740,000 1,130,000
Cost of equipment sales 1,430,285 10,799,136 3,474,892
Recovery of investment in direct finance leases 164,295 2,095,063 2,955,733
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 6,353,095 (6,087,949) 296,759
Decrease in payables to affiliates (44,739) (20,454) (55,695)
Increase (decrease) in accounts payable
and accrued liabilities (117,034) 84,188 234,392
Decrease in rents received in advance (162,931) (67,570) (29,893)
------------ ------------ ------------
Net cash provided by operating activities 8,482,195 13,359,252 16,369,904
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate - - (1,142,624)
Investment in direct finance leases, acquired from affiliate - - (123,945)
------------ ------------ ------------
Net cash used in investing activities - - (1,266,569)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (7,835) (4,432,906) (4,876,162)
Principal payments on financed operating lease rentals (1,123,270) (377,585) (172,559)
Distributions to partners (9,624,188) (8,357,211) (11,744,201)
Redemptions of Class A limited partner units (699) (24,152) (130,788)
------------ ------------ ------------
Net cash used in financing activities (10,755,992) (13,191,854) (16,923,710)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,273,797) 167,398 (1,820,375)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,839,510 2,672,112 4,492,487
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 565,713 $ 2,839,510 $ 2,672,112
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 28 $ 193,516 $ 501,872
Interest paid on financed operating lease receivables 40,754 55,889 89,585
</TABLE>
* As restated - See Note 1 to the Partnership's Financial Statements
See accompanying notes to financial statements.
-17-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
ORGANIZATION
Capital Preferred Yield Fund, a California limited partnership (the
"Partnership"), was organized on July 13, 1989 under the laws of the State
of California pursuant to an Agreement of Limited Partnership (the
"Partnership Agreement"). The Partnership was formed for the purpose of
acquiring and leasing a diversified portfolio of equipment to unaffiliated
third parties. The general partner of the Partnership is CAI Partners
Management Company, a wholly owned subsidiary of Capital Associates
International, Inc. ("CAII"). The general partner manages the Partnership,
including investment of funds, purchase and sale of equipment, lease
negotiation and other administrative duties.
The Partnership is in its liquidation stage, as defined in the Partnership
Agreement. During 1997, the Partnership sold a substantial portion of its
assets, and all remaining equipment was sold during 1998. A final
distribution was declared to the partners in accordance with the
liquidation provisions in the Partnership Agreement in December 1998. It is
the intent of the general partner to collect the remaining receivables and
settle all liabilities during 1999. Excess cash remaining after settlement
of liabilities, if any, will be distributed to the Partners in accordance
with the Partnership Agreement. The Partnership was legally dissolved on
December 31, 1998.
CAII is the Class B limited partner. CAII contributed $5,538,805 of
equipment to the Partnership in exchange for its Class B limited
partnership interest, which represented 10% of the net offering proceeds.
CAII has no remaining obligation to contribute cash and/or equipment to the
Partnership.
RESTATEMENT
During December 1997, the Partnership sold a substantial portion of its
assets. Due to a mathematical error in the calculation of sales proceeds,
the total sales proceeds placed in escrow exceeded the ultimate obligation
of the buyer by approximately $520,000, resulting in an overstatement of
equipment sales margin for the year ended December 31, 1997 by such amount.
The accompanying 1997 financial statements have been restated for the
correction of this error. The following table summarizes the restatement
impact on total partners' capital, net income and net income per weighted
average Class A Limited Partner Unit as of and for the year ended December
31, 1997.
Total Partners' capital as previously reported $ 9,125,143
Effects of sales proceeds adjustment (520,390)
-----------
As restated $ 8,604,753
===========
-18-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
RESTATEMENT, continued
Net income as previously reported $ 2,576,510
Effect of sales proceeds adjustment (520,390)
-----------
As restated $ 2,056,120
===========
Net income per weighted average Class A
Limited Partner Unit outstanding as
previously reported $ 8.26
Effect of sales proceeds adjustment (1.92)
--------
As restated $ 6.34
========
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. For leasing entities, this includes the
estimate of residual values, as discussed below. Actual results could
differ from those estimates.
PARTNERSHIP CASH DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS
Cash Distributions
------------------
During the Reinvestment Period, as defined in the Partnership Agreement,
cash distributions were made as follows:
First, the general partner and the Class A limited partners received
4.5% and 95.5%, respectively, of available cash until the Class A
limited partners received annual, non-compounded cumulative
distributions equal to 12% of their contributed capital during the
first three years after the initial closing date (January, 23, 1990)
and 13% of their contributed capital thereafter.
Second, the general partner and the Class B limited partner receive
4.5% and 95.5%, respectively, of available cash until the Class B
limited partner received annual non-compounded cumulative
distributions equal to 11% of its contributed capital. Any remaining
available cash was reinvested or distributed to the partners as
specified in the Partnership Agreement.
-19-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
PARTNERSHIP CASH DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS,
continued
Cash Distributions, continued
------------------
During the Liquidation Stage, as defined in the Partnership Agreement, cash
distributions were made as follows:
First, in accordance with the first and second allocations during the
Reinvestment Period as described above.
Second, 95.5% to the Class A limited partners and 4.5% to the general
partner, until the Class A limited partners received aggregate
distributions from all sources equal to their capital contributions
plus their Priority Return, as defined in the Partnership Agreement.
Third, 85.5% to the Class B limited partner, 10% to the Class A
limited partners and 4.5% to the general partner until the Class B
limited partner has received aggregate distributions from all sources
equal to its capital contributions plus its Subordinated Priority
Return, as defined in the Partnership Agreement.
Thereafter, 90% to the Class A limited partners and the Class B
limited partner (and among them in proportion to their respective
capital contributions as of the first day of the calendar month for
which the amount of such distribution is being determined), and 10% to
the general partner.
Federal Income Tax Basis Profits and Losses
-------------------------------------------
Profits for any fiscal period were allocated according to the following
provisions:
First, profit was allocated to the partners in proportion to, and to
the extent of, any excess losses allocated to the partners as
described in the Partnership Agreement.
Second, any remaining profit was allocated to the partners in
proportion to, and to the extent of, all losses allocated to the
partners for all prior fiscal periods in reverse chronological order.
Third, any remaining profit was allocated 85.5% to the Class A limited
partners, 10% to the Class B limited partner, and 4.5% to the general
partner, until the Class A limited partners were allocated an amount
equal in the aggregate to the greater of (i) a 10% annual cumulative
return, non-compounded, or (ii) a 9% annual cumulative return
compounded daily on the Class A limited partners' adjusted purchase
price of units, calculated from the first day of the month following
the month each Class A limited partner (or a predecessor) was admitted
to the Partnership.
-20-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
PARTNERSHIP CASH DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS,
continued
Federal Income Tax Basis Profits and Losses, continued
-------------------------------------------
Fourth, any remaining profit was allocated 10% to the Class A limited
partners, 4.5% to the general partner, and 85.5% to the Class B
limited partner until the Class B limited partner was allocated an
amount equal to a 9% annual cumulative return compounded daily on the
Class B limited partner's unreturned subordinated capital contribution
calculated from the first day of the month following the month in
which any subordinated capital contribution is first made.
Fifth, any remaining profit was allocated 90% to the Class A limited
partners and Class B limited partner (and among them in proportion to
their respective capital contributions) and 10% to the general
partner.
Losses for any fiscal period were allocated according to the following
priorities:
First, to the partners in proportion to, and to the extent of, any
profits allocated for such fiscal period and all prior fiscal periods
in reverse chronological order and priority.
Second, 91.08% to the Class A limited partners, 7.92% to the Class B
limited partner, and 1% to the general partner.
Losses allocated to a partner in the first and second paragraphs above
cannot cause or increase an adjusted capital account deficit with respect
to such partner as of the end of any fiscal period. To the extent losses
allocated to a partner would exceed this limitation, such losses will be
allocated first to other partners in proportion to, and to the extent of,
their positive capital account balances, and then to the general partner.
Financial Reporting - Profits and Losses
----------------------------------------
For financial reporting purposes, net income was allocated to the partners
in a manner consistent with the allocation of cash distributions.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
-21-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is
defined as all recognized changes in equity during a period from
transactions and other events and circumstances except those resulting from
investments by owners and distributions to owners. Net income and items
that previously have been recorded directly in equity are included in
comprehensive income. Statement 130 affects only the reporting and
disclosure of comprehensive income but does not affect recognition or
measurement of income. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Partnership adopted Statement 130 in the first quarter of 1998. The
adoption did not have an impact on its financial reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
provides guidance for reporting information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial reports of public companies.
An operating segment is defined as a component of a business that engages
in business activities from which it may earn revenue and incur expenses, a
component whose operating results are regularly reviewed by the company's
chief operating decision maker, and a component for which discrete
financial information is available. Statement 131 establishes quantitative
thresholds for determining operating segments of a company. Statement 131
is effective for fiscal years beginning after December 15, 1997, with
earlier application permitted. The Partnership adopted Statement 131 in the
first quarter of 1998. Since the Partnership operates in a single business
segment, the adoption did not have an impact on its financial reporting.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. Statement 133 is effective for fiscal years beginning after June 15,
1999, with earlier application permitted. Statement 133 will have no effect
on the Partnership's financial reporting.
-22-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
LONG-LIVED ASSETS
The Partnership accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets, including
equipment subject to operating leases and certain identifiable intangibles
to be held and used by an entity, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In performing the review for recoverability,
the entity should estimate the future net cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future net cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets,
including equipment subject to operating leases and identifiable
intangibles held by the Partnership, is based on the fair value of the
asset. The fair value of the asset may be calculated by discounting the
expected future net cash flows at an appropriate interest rate.
LEASE ACCOUNTING
Statement of Financial Accounting Standards No. 13, Accounting for Leases,
requires that a lessor account for each lease by the direct finance,
sales-type or operating lease method. The Partnership currently utilizes
the direct financing and operating methods for all of the Partnership's
equipment under lease. Direct finance leases are defined as those leases
which transfer substantially all of the benefits and risks of ownership of
the equipment to the lessee. For all types of leases, the determination of
profit considers the estimated value of the equipment at lease termination,
referred to as the residual value. After the inception of a lease, the
Partnership may engage in financing of lease receivables on a nonrecourse
basis (i.e., "non-recourse debt" or "discounted lease rentals") and/or
equipment sale transactions to reduce or recover its investment in the
equipment.
The Partnership's accounting methods and their financial reporting effects
are described below.
NET INVESTMENT IN DIRECT FINANCE LEASES ("DFLS")
The cost of the equipment, including acquisition fees paid to the general
partner, is recorded as net investment in DFLs on the accompanying balance
sheet. Leasing revenue, which is recognized over the term of the lease,
consists of the excess of lease payments plus the estimated residual value
over the equipment's cost. Earned income is recognized monthly to provide a
constant yield and is recorded as direct finance lease income on the
accompanying income statements. Residual values are established at lease
inception equal to the estimated value to be received from the equipment
following termination of the initial lease (which in certain circumstances
includes anticipated re-lease proceeds), as determined by the general
partner. In estimating such values, the general partner considers all
relevant information regarding the equipment and the lessee.
-23-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
EQUIPMENT ON OPERATING LEASES ("OLS")
The cost of equipment, including acquisition fees paid to the general
partner, is recorded as leased equipment in the accompanying balance sheets
and is depreciated on a straight-line basis over the lease term to an
amount equal to the estimated residual value at the lease termination date.
Leasing revenue consists principally of monthly rents and is recognized as
operating lease rentals in the accompanying income statements. Residual
values are established at lease inception equal to the estimated value to
be received from the equipment following termination of the initial lease
(which in certain circumstances includes anticipated re-lease proceeds), as
determined by the general partner. In estimating such values, the general
partner considers all relevant information and circumstances regarding the
equipment and the lessee. Because revenue, depreciation expense and the
resultant profit margin before interest expense are recorded on a
straight-line basis, and interest expense on discounted lease rentals
(discussed below) is recorded on the interest method, lower returns are
realized in the early years of the term of an OL and higher returns in
later years.
NON-RECOURSE DISCOUNTING OF RENTALS
The Partnership may assign the future rentals from leases to financial
institutions, or acquire leases subject to such assignments, at fixed
interest rates on a non-recourse basis. In return for such assigned future
rentals, the Partnership receives the discounted value of the rentals in
cash. In the event of default by a lessee, the financial institution has a
first lien on the underlying leased equipment, with no further recourse
against the Partnership. Cash proceeds from such financings, or the
assumption of such financings, are recorded on the balance sheet as
discounted lease rentals. As lessees make payments to financial institu
tions, leasing revenue and interest expense are recorded.
NON-RECOURSE FINANCING OF OPERATING LEASE RENTALS
The Partnership may assign substantially all of its rights under certain
operating leases to a purchaser and subsequently the purchaser may assign
the rentals from such leases to a financial institution at fixed interest
rates on a non-recourse basis. The Partnership receives the discounted
value of the rentals in cash from the financial institution. As with
discounted lease rentals discussed above, in the event of default by a
lessee, the financial institution has a first lien on the underlying leased
equipment, with no further recourse against the Partnership or the
Partnership's assets. The purchaser cannot be the owner of the equipment
for financial reporting purposes because the purchaser has not made a
sufficient investment in the equipment and does not have significant risks
of ownership. Therefore, the transaction cannot be recorded as a sale.
Accordingly, cash proceeds from financings related to such transactions are
recorded on the balance sheet as financed operating lease rentals. As
lessees make payments to financial institutions, leasing revenue and
interest expense are recorded.
-24-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
ALLOWANCE FOR LOSSES
An allowance for losses is maintained at levels determined by the general
partner to adequately provide for any other-than-temporary declines in
asset values. In determining losses, economic conditions, the activity in
the used equipment markets, the effect of actions by equipment
manufacturers, the financial condition of lessees, the expected courses of
action by lessees with regard to leased equipment at termination of the
initial lease term, and other factors which the general partner believes
are relevant, are considered. Asset chargeoffs are recorded upon the
termination or remarketing of the underlying assets. The lease portfolio is
reviewed quarterly to determine the adequacy of the allowance for losses.
TRANSACTIONS SUBSEQUENT TO INITIAL LEASE TERMINATION
After the initial lease term of equipment on lease expires, the equipment
is either sold or re-leased to the existing lessee or another third party.
The remaining net book value of equipment sold is removed and gain or loss
recorded when equipment is sold. The accounting for re-leased equipment is
consistent with the accounting described under "Net Investment in Direct
Finance Leases" and "Equipment on Operating Leases" above.
INCOME TAXES
No provision for income taxes has been made in the financial statements
since taxable income or loss is recorded in the tax returns of the
individual partners.
CASH EQUIVALENTS
The Partnership considers short-term, highly liquid investments that are
readily convertible to known amounts of cash to be cash equivalents. Cash
equivalents of $2,776,000 at December 31, 1997, are comprised of
investments in a money market fund which invests solely in U.S. Government
securities having maturities of 90 days or less.
EQUIPMENT HELD FOR SALE OR RE-LEASE
Equipment held for sale or re-lease, recorded at the lower of cost or
market value expected to be realized, consists of equipment previously
leased to end users which has been returned to the Partnership following
lease expiration.
NET INCOME PER CLASS A LIMITED PARTNER UNIT
Net income per Class A limited partner unit is computed by dividing the net
income allocated to the Class A limited partners by the weighted average
number of Class A limited partner units outstanding during the period.
-25-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
2. Net Investment in Direct Finance Leases
---------------------------------------
The components of the net investment in direct finance leases as of
December 31, 1997 were:
1997
----
Minimum lease payments receivable $ 58,429
Estimated residual values 195,418
Deferred initial leasing costs, net 1,873
Less unearned income (26,024)
---------
$ 229,696
=========
3. Leased Equipment
----------------
The Partnership's investments in equipment on operating leases by major
classes as of December 31, 1997 were:
1997
----
Transportation and industrial equipment $ 2,796,018
Computers and peripherals 822,667
Office furniture and equipment 1,689,361
Medical and research equipment 377,503
Other 60,350
------------
Total 5,745,899
Less:
Accumulated depreciation (4,593,820)
Allowance for losses (77,479)
------------
$ 1,074,600
============
Depreciation expense for 1998, 1997 and 1996 was $234,754, $3,760,718 and,
$6,124,604, respectively.
4. Transactions With the General Partner and Affiliates
----------------------------------------------------
Maximum Front-end Fee
---------------------
Pursuant to the Partnership Agreement, the total of all front-end fees
(sales commissions, organization and offering costs, acquisition fees and
reimbursements and initial leasing costs) may not exceed an amount which
would cause the Partnership's investment in equipment (total cost of
equipment excluding front-end fees) to be less than the greater of (1) a
percentage amount of total Class A limited partners' capital contributions
equal to 80% minus .0625% for each 1% of the aggregate purchase price of
-26-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
4. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
Maximum Front-end Fee, continued
--------------------------------
equipment that is borrowed by the Partnership (determined by dividing the
principal amount of all such indebtedness incurred by the Partnership by
the aggregate purchase price of the equipment) or (2) 75% of the total
Class A limited partners capital contributions. The maximum fee was reached
in July 1993. Equipment purchases after July 1993 did not include any
acquisition fees, reimbursements or initial lease cost payments to the
general partner.
Management Fees
---------------
As permitted under the terms of the Partnership Agreement, the general
partner receives management fees as compensation for services performed in
connection with managing the Partnership's equipment equal to the lesser of
(a) 5% of gross rentals received (limited to 2% of gross rentals received
in the case of full payout leases) or (b) the fee which the general partner
reasonably believes to be competitive with that which would be charged by a
non-affiliate for rendering comparable services. Such fees totaled $34,133,
$425,860 and $702,219 in 1998, 1997 and 1996, respectively.
Direct Services
---------------
The general partner and its affiliates provide accounting, investor
relations, billing, collecting, asset management, and other administrative
services to the Partnership. The Partnership reimburses the general partner
for these services performed on its behalf as permitted under the terms of
the Partnership Agreement. Such reimbursements totaled $95,968, $136,955
and 101,145 in 1998, 1997 and 1996, respectively.
5. Tax Information (Unaudited)
---------------
The following reconciles net income for financial reporting purposes to
income for federal income tax purposes for the years ended December 31,:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income per financial statements $ (211,615) $ 2,056,120 $ 2,239,112
Differences due to:
Direct finance leases 163,833 2,090,563 2,949,142
Depreciation (707,805) (455,865) (2,802,075)
Provision for losses 836,085 740,000 1,130,000
Gain (loss) on sale of equipment (4,445,445) 3,022,140 (2,624,981)
Other 36,245 (131,242) 302,689
----------- ----------- -----------
Partnership income (loss) for federal income tax purposes $(4,328,702) $ 7,321,716 $ 1,193,887
=========== =========== ===========
</TABLE>
-27-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
5. Tax Information (Unaudited), continued
---------------
As of December 31, 1998, the partners' capital accounts per the
accompanying financial statements and for federal income tax purposes were
$0.
6. Concentration of Credit Risk
----------------------------
The Partnership's cash balance is maintained with a high credit quality
financial institution. At times such balances may exceed the FDIC insurance
limit due to the receipt of lockbox amounts that have not cleared the
presentment bank (generally for less than two days).
The Partnership leased equipment to a significant number of lessees. Two
lessees and their affiliates accounted for approximately 20% ($578,932) and
10% ($297,550) of total leasing and remarketing revenue of the Partnership
during 1998.
7. Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
Statement of Financial Standards No. 107, Disclosures about Fair Value of
Financial Instruments specifically excludes certain items from its
disclosure requirements such as the Partnership's investment in leased
assets. The carrying amounts at December 31, 1998 for cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
payables to affiliates and distributions payable to partners approximate
their fair values due to the short maturity of these instruments.
-28-
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP:
Under date of February 22, 1999, we reported on the balance sheets of Capital
Preferred Yield Fund, a California limited partnership, as of December 31, 1998
and 1997, and the related statements of operations income, partners' capital,
and cash flows for each of the years in the three-year period ended December 31,
1998, as contained in the Partnership's annual report on Form 10-K for the year
1998. In connection with our audits of the aforementioned financial statements,
we also audited the related financial statement Schedule II, as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
--------------------
KPMG LLP
Denver, Colorado
February 22, 1999
-29-
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1998, 1997 and 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ---------- ---------- --------
Balance at Additions Balance
Beginning Charged to at End
Classification of Year Expenses Deductions of Year
- -------------- ---------- ---------- ---------- --------
1998
- -----------------------
Allowance for losses:
Accounts receivable $ 12,000 $ 269,441 $ 60 $ 281,501
Equipment on leases 77,479 566,644 (644,123) -
--------- ----------- ----------- ---------
Totals $ 89,479 $ 836,085 $ (644,063) $ 281,501
========= =========== =========== =========
1997
- -----------------------
Allowance for losses:
Accounts receivable $ 5,000 $ 7,000 $ - $ 12,000
Equipment on leases 242,760 740,000 (905,281) 77,479
--------- ----------- ----------- ---------
Totals $ 247,760 $ 747,000 $ (905,281) $ 89,479
========= =========== =========== =========
1996
- -----------------------
Allowance for losses:
Accounts receivable $ 5,000 $ - $ - $ 5,000
Equipment on leases 673,003 1,130,000 (1,560,243) 242,760
--------- ----------- ----------- ---------
Totals $ 678,003 $ 1,130,000 $(1,560,243) $ 247,760
========= =========== =========== =========
(1) Represents charge-offs against allowance and recoveries.
See ac companying independent auditors' report.
-30-
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
----------------------------------------------------
None
Item 10. Directors and Executive Officers of the Partnership
---------------------------------------------------
The Partnership has no officers and directors. The general partner manages and
controls the affairs of the Partnership and has general responsibility and
authority in all matters affecting its business. Information concerning the
directors and executive officers of the general partner is as follows:
CAI Partners Management Company
Name Positions Held
---- --------------
John F. Olmstead President and Director
Anthony M. DiPaolo Senior Vice President, Principal Financial and
Chief Administrative Officer and Director
Richard H. Abernethy Vice President and Director
Joseph F. Bukofski Vice President, Assistant Secretary and Director
Robert A. Golden Director
Mick Myers Director
Ann Danielson Assistant Vice President
David J. Anderson Chief Accounting Officer and Secretary
JOHN F. OLMSTEAD, age 54, joined CAII as Vice President in December, 1988, is a
Senior Vice President of CAI and CAII and is head of CAII's Public Equity
division. He has served as Chairman of the Board for Neo-kam Industries, Inc.,
Matchless Metal Polish Company, Inc. and ACL, Inc. for more than 5 years. He has
over 20 years of experience holding various positions of responsibility in the
leasing industry. Mr. Olmstead holds a Bachelor of Science degree from Indiana
University and a Juris Doctorate degree from Indiana Law School.
ANTHONY M. DIPAOLO, age 40, joined CAII in July 1990 as Assistant Treasurer and
is currently Senior Vice President-Chief Financial Officer. He also held the
positions of Senior Vice President-Controller and Assistant Vice
President-Credit Administration for the Company. Mr. DiPaolo has held similar
senior financial management positions with two public companies between 1986 and
June 1990, and prior to then was an audit manager for the public accounting firm
of Coopers & Lybrand. Mr. DiPaolo holds a Bachelor of Science degree in
Accounting from the University of Denver.
RICHARD H. ABERNETHY, age 45, joined CAII in April 1992 as Equipment Valuation
Manager and currently serves as Vice President of Portfolio Management. Mr.
Abernethy has thirteen years experience in the leasing industry, including prior
positions with Barclays Leasing Inc., from November 1986 to February 1992, and
Budd Leasing Corporation, from January 1981 to November 1986. Mr. Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.
-31-
<PAGE>
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
JOSEPH F. BUKOFSKI, age 43, joined CAII in June 1990 as a Financial Analyst. Mr.
Bukofski is currently the Vice President-Pricing. Prior to joining the Marketing
Department, Mr. Bukofski was Assistant Vice President and Controller. Prior to
joining the Company, he was a geologist with Barringer Geoservices, Inc. for
eleven years. Mr. Bukofski holds a Bachelor of Science degree in Secondary
Education - Earth Science from Bloomsburg University and a Masters of Science in
Accounting from the University of Colorado.
ROBERT A. GOLDEN, age 53, is Vice President and the National Sales Manager of
the Company. Mr. Golden joined the Company in 1993 as a Branch Manager. He was
promoted to his current position in September 1994. Prior to joining the
Company, he was an Executive Vice President with the U.S. Funds Group, President
of BoCon Capital Group and Vice President with Ellco/GE Capital for fifteen
years. Mr. Golden is an officer, but not a director, of CAII.
MICK MYERS, age 41, joined CAI in February 1992 as a Senior Portfolio Manager.
Currently he is Assistant Vice President of Asset Management. Mr. Myers has nine
years experience in the leasing industry. Previously, he has held the position
of Senior End of Lease Negotiator with ELLCO/GE Capital. Mr. Myers holds a
Bachelor of Science degree from the University of Wyoming.
ANN E. DANIELSON, age 35, joined CAII in February 1990 and is currently
Assistant Vice President, Assistant Treasurer and is responsible for the
Company's cash management and collections functions. Prior to joining the
Company, she was with U.S. West financial Services and Coopers & Lybrand. Ms.
Danielson holds a Bachelor of Arts Degree from the University of Northern Iowa.
DAVID J. ANDERSON, age 46, joined CAII in August 1990 as Manager of Billing &
Collections and currently serves as Assistant Vice-President/Assistant
Controller. Prior to joining CAII, Mr. Anderson was Vice- President/Controller
for Systems Marketing, Inc., from 1985 to 1990, and previous to that worked in
several senior staff positions at the Los Alamos National Laboratory and with
Ernst & Whinney. Mr. Anderson holds a Bachelor of Business Administration degree
in Accounting from the University of Wisconsin.
Item 11. Executive Compensation
----------------------
No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report, "Certain Relationships and Related
Transactions", for a description of the compensation and fees paid to the
general partner and its affiliates by the Partnership during 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person is known by the Partnership to be the
beneficial owner of more than 5% of the Class A limited partner units
of the Partnership. The Partnership has no directors or officers, and
neither the general partner nor the Class B limited partner of the
Partnership own any Class A limited partner units.
CAII, the parent of the general partner, owns 100% of the
Partnership's Class B limited partner interest.
-32-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management,
----------------------------------------------------------------------
continued
CAI Partners Management Company owns 100% of the Partnership's general
partner interest.
The names and addresses of the general partner and the Class B limited
partner are as follows:
General Partner
---------------
CAI Partners Management Company
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
Class B Limited Partner
-----------------------
Capital Associates International, Inc.
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
(b) No directors or officers of the general partner or the Class B limited
partner owned any Class A limited partner units as of December 31,
1998.
(c) The Partnership knows of no arrangements, the operation of which may
at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The general partner and its affiliates receive certain types of compensation,
fees or other distributions in connection with the operations of the
Partnership.
Following is a summary of the amounts paid or payable to the general partner and
its affiliates during 1998:
Management Fees
- ---------------
The general partner receives a monthly fee as compensation for services rendered
in connection with managing the Partnership's equipment in an amount equal to
the lesser of (i) 5% of gross rentals received by the Partnership (but limited
to 2% of gross rentals received in the case of full payout leases), or (ii) the
fee which the general partner reasonably believes to be competitive with that
which would be charged by a non-affiliate for rendering comparable services.
Management fees of $34,133 were earned by the general partner during 1998.
-33-
<PAGE>
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
Accountable General and Administrative Expenses
- -----------------------------------------------
The general partner is entitled to reimbursement of certain expenses paid on
behalf of the Partnership which are incurred in connection with the
Partnership's operations. Such reimbursable expenses amounted to $95,968 during
1998.
General Partner and Class B Limited Partner Distributions
- ---------------------------------------------------------
Additionally, the general partner receives 4.5% of Partnership cash
distributions, and is allocated certain Partnership income and gain, relating to
its general partnership interest. Distributions declared and net income
allocated to the general partner totaled $377,708 for 1998. Distributions
declared and net loss allocated to the Class B limited partner totaled $456,951
and $41,383, respectively, for 1998.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)
and
(d) The following documents are filed as part of this Report:
1. Financial Statements
2. Financial Statement Schedule
(b) The Partnership did not file any reports on Form 8-K during the three
months ended December 31, 1998.
(c) Exhibits required to be filed.
Exhibit Exhibit
Number Name
------- -------
4.1* Capital Preferred Yield Fund Limited Partnership Agreement
dated July 13, 1989 filed as Exhibit 4.1 to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
4.2* First Amendment to Limited Partnership Agreement dated
December 31, 1991. (Filed April 1, 1992.)
4.3* Second Amendment to Limited Partnership Agreement dated
March 31, 1992. (Filed May 15, 1992.)
* Not filed herewith. In accordance with Rule 12b-32 of the
General Rules and Regulations under the Securities Exchange
Act of 1934, reference is made to the document previously
filed with the Commission.
-34-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1999 Capital Preferred Yield Fund,
A California Limited Partnership
By: CAI Partners Management Company
By: /s/John F. Olmstead
--------------------------------
John F. Olmstead
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the general partner
of the Partnership and in the capacities indicated on March 30, 1999.
Signature Title
/s/John F. Olmstead
- --------------------------
John F. Olmstead President and Director
/s/Anthony M. DiPaolo Senior Vice President, Principal Financial and
- -------------------------- Chief Administrative Officer and Director
Anthony M. DiPaolo
/s/Richard H. Abernethy
- --------------------------
Richard H. Abernethy Vice President and Director
/s/Joseph F. Bukofski
- --------------------------
Joseph F. Bukofski Vice President, Assistant Secretary and Director
/s/Robert A. Golden
- --------------------------
Robert A. Golden Director
/s/Mick Myers
- --------------------------
Mick Myers Director
/s/Ann Danielson
- --------------------------
Ann Danielson Assistant Vice President
/s/David J. Anderson
- --------------------------
David J. Anderson Chief Accounting Officer and Secretary
-35-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 565,713
<SECURITIES> 0
<RECEIVABLES> 232,994
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 798,707
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 798,707
<SALES> 818,235
<TOTAL-REVENUES> 1,512,345
<CGS> 0
<TOTAL-COSTS> 1,723,960
<OTHER-EXPENSES> 130,101
<LOSS-PROVISION> 836,085
<INTEREST-EXPENSE> 40,782
<INCOME-PRETAX> (211,615)
<INCOME-TAX> 0
<INCOME-CONTINUING> (211,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (211,615)
<EPS-PRIMARY> (2.18)
<EPS-DILUTED> (2.18)
</TABLE>
